Question

. On December 31, 2017, Eastern Inc. leased machinery with a fair value of $420,000 from Northern Rentals. The agreement is a six-year non-cancellable lease requiring annual payments of $80,000 beginning December 31, 2017. The lease is appropriately accounted for by Eastern as a finance lease. Eastern’s incremental borrowing rate is 11%; however, they also know that the interest rate implicit in the lease payments is 10%. Eastern adheres to IFRS.

The present value of an annuity due for 6 years at 10% is 4.7908.

The present value of an annuity due for 6 years at 11% is 4.6959.

On its December 31, 2017 statement of financial position, Eastern should report a lease liability of (rounded to the nearest dollar)

a) $303,264.

b) $340,000.

c) $375,672.

d) $383,264.

19. Frank Corporation has an asset with a fair market value of $200,000 that it wants to lease. Frank’s wants to recover its net investment in the leased asset and earn a 10% return. The asset will revert back to Frank’s at the end of a 6-year lease term. If Frank’s charges rent annually at the beginning of the year, what should amount should the annual rent be (rounded to whole dollars)?

a) $18,817

b) $33,333

c) $41,747

d) $53,333

20. Rabbit Inc. has an asset with a fair market value of $450,000 that it wants to lease. Rabbit’s wants to recover its net investment in the leased asset and earn an 8%. The asset will revert back to Rabbit’s at the end of a 5-year lease term and it is expected that the residual value of the asset will be $20,000 at the end of the lease. If Rabbit wants to charge rent semi-annually starting at the beginning of the lease, what amount should the lease payments be (rounded to whole dollars)?

a) $60,817

b) $62,096

c) $101,200

d) $104,367

Answer 1

Hi,

I have calculated annual lease payment by using IFRS 16, where present value of lease is calculated and lease liability is recognized lower of fair value of assets and present value of lease.